Autonomy Founder Mike Lynch Rejects HP Charges, Alleges Mismanagement

I just got off the phone with Mike Lynch, the founding CEO of Autonomy. As you might expect, he has a different view of events surrounding the allegations leveled by Hewlett-Packard today concerning Autonomy’s role in an $8.8 billion write-down.

Calling from the U.K., Lynch said that he had been “ambushed” by HP’s accusations, and that he hasn’t been contacted in any official capacity by HP, its lawyers or anyone else; the first he heard about the accusations against Autonomy management was via the press release.

He went on to accuse HP of mismanaging Autonomy and essentially sabotaging its performance after the $11.7 billion acquisition closed. He said that once Autonomy was in the HP tent, HP managers arbitrarily added a 30 percent markup on Autonomy software, which had the effect of driving some longtime customers away. In other cases, Lynch said, HP salespeople were paid commissions to sell third-party products that competed with Autonomy, but no commissions to sell Autonomy products.

Below is a transcript of our conversation:

AllThingsD: Mike, thanks for the call. I presume you have a different view of events concerning the accusations leveled by HP against your former company, Autonomy.

Lynch: Basically, we reject completely the assertion of HP. It’s completely wrong. The reality of the situation is that when HP bought Autonomy it had hundreds of people involved in due diligence, which was described at the time as “meticulous.” And KPMG, Barclays and Perello were all involved there. And they’ve actually run it for a year. To somehow admit a $9 billion elephant in the room just beggars belief, frankly.

What do you think of the specifics of the allegations? There were hardware sales, sales of software to value-added resellers, and some concerning some subscription revenue that was booked incorrectly. Can you address any of the specifics?

I don’t know any of the specifics because no one has been in touch with us. We’ve not heard anything from any partner other than what’s been in the press release. It’s been a bit of an ambush. I don’t know what she’s referring to or why. Obviously, there are differences between IFRS [International Financial Reporting Standards] accounting and the U.S. GAAP system, but the fact is that all our financial information was given to Deloitte, which, unlike most European accounting firms, audited us every quarter. And consequently we’re confident in the numbers being right.

Do you anticipate being sued personally by HP, or investigated criminally in this matter? Have you retained counsel?

As I said, I’ve heard nothing from anyone, not even from HP. You’re the first person that has mentioned these to me. I completely and absolutely reject the suggestions. So let’s see some evidence and we’ll explain it from there. All we’ve done is gotten a press release. There haven’t been any of the lawyer letters that one might expect in a matter such as this.

The sad thing about this is that it’s a distraction. Having been on HP’s Executive Council, I walked into a company that was riddled with internecine warfare, and obviously Léo Apotheker and Shane Robison [HP’s former chief strategy officer] had a strategy, which was about taking down certain parts of the business and divesting them. And obviously there was another one of those Hewlett-Packard coup d’etats. And Léo and Shane were out, and the other divisions became more powerful, and we obviously had a very hard time inside HP.

What you saw was a situation where hundreds of the Autonomy staff left — remember, it was a pretty small company with a small staff — they all left, and the senior management team left. There was significant mismanagement of the asset. So the quarter when the numbers at Autonomy went south was the quarter that HP took over and took over the sales process.

They did things like, if the customer had an enterprise sales agreement with Autonomy, they could no longer buy through Autonomy, they had to buy through HP’s Enterprise Services Group. And ES insisted on putting a 30 percent markup on the software. So, suddenly, established customers had to pay 30 percent more for that software. And that is just one of a long list of examples.

If an HP salesperson sold a competitive product, they got a commission. If they sold Autonomy, they didn’t. These are the kinds of internal issues that went on and greatly damaged the Autonomy business and led to a great number of the Autonomy staff leaving. Since the management team has left, it’s sad to see that the company’s prospects have deteriorated. And I guess that is what is behind this write-off.

It sounds like much of this goes back to the fundamental question of Léo Apotheker’s strategy. He wanted to move HP toward high-margin businesses like software and get out of low-margin hardware like PCs and printers.

There was a strategy which the board of directors had authorized Léo and Shane to carry out, and acquiring Autonomy was a key part of that decision. When they were ousted, the decision to divest the hardware business was reversed, and you had a very messy strategic situation.

Then it really comes down to questions of accounting, and you think it can all be properly explained.

If we are given the chance to explain it, it can all be properly explained. You will see that all the information was given to our auditors, who made the correct decisions under IFRS, I have no doubt.

Meg was on CNBC and on conference calls today, laying much of this at your door, if not directly, then by inference, reminding people that she let you go after Autonomy failed to make its numbers, and so forth. We’ve never heard the other side of that conversation. Can you give any insight into it?

Sadly, when these things happen one gets gagged. The reason why those numbers were low in that quarter was because of the switchover to HP managing the sales process. As I said, arbitrary markups were added on, and commissions were given to people to sell against Autonomy. And Autonomy deals were wrapped up into packages, which means that the normal course of selling software at the end of the quarter was defeated. So this is just an example of what went on, and what we’re really talking about is a company not understanding the software business. And not understanding an acquisition. I’m afraid it’s an ongoing situation. You saw it with Palm and with EDS. And the important thing about Autonomy is that it has a great history. Obviously, for the first two quarters the business was fine within HP until these management changes were put in place. There were silly things like divisions of HP refusing to sell Autonomy because it hadn’t been certified by them. This kind of internal bureaucracy and infighting going on there led to the staff leaving. Autonomy is the kind of company where the staff is really vital, and there were hundreds lost during that spring period. And then most of the senior management team left. By then, the company was so damaged, to the point where the numbers are not going to continue on the line that you would like them to.

HP says it was a member of your senior management team who came forward with these allegations. Do you know who that is, and can you name them?

No. Again, I have no idea what they’re talking about. I don’t believe any of the senior people are still there. So I’m afraid I’m in the dark.

Is it possible, then, from your point of view, that HP is trying to take a big charge, recalibrate its financial position and simply lay as much of the blame as possible on Autonomy?

I think the reality is that the business has not been managed in the last year. It’s not inconceivable that the business has gone down in value. The question here is about the amount. I suspect that every spare cent has been thrown into this write-down. Meg has spent the day talking about this, more than she has about delivering the worst results in HP’s 70-year history. HP needs to think more about the fundamental problems of its business. I hope they can rebuild what was once a great Silicon Valley company.

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